Budgeting 101

Author:
Publish date:

It may be business 101, but a majority of equine practitioners don’t have a budget for their business.

Image placeholder title

Whether they’re too busy, afraid of the numbers, or they simply don’t think it’s necessary, budgeting is one business practice that hasn’t quite caught on.

They’re not alone. Equine practices join other small businesses in their budget-bypassing habits. That’s why there’s no shortage of advice out there on how to build a budget: Because no one actually does it and everyone should. “Most veterinarians do not have budgets, that’s true,” says Elise Lacher, CPA with Strategic Veterinary Consulting, Inc. “And most [regular] businesses don’t have a budget, either. It’s a four-letter word as far as most businesses are concerned.”

As you plan for 2010, consider your budget as a GPS for your business. It will tell you which way to turn as you navigate your future. Should you spend more on marketing? What about that new, portable, digital X-ray? Can you afford it, and will it pay for itself? How do you mitigate the ever-changing cost of fuel? A budget is simply a tool to facilitate the business-decision-making process, and one no successful practice can afford to go without.

It’s Art, Not Science

There’s no recipe for what ingredients a budget should contain. And there are several ways to look at the numbers. Lacher explains that she prefers to look at expenses as a percent of total revenue rather than hard numbers. In other words, knowing that office expenses were 15 percent of total revenue is more meaningful than knowing they were $30,000.

Although you measure expenses both ways, knowing the percentage of gross revenues for each line item gives you a snapshot of your practice and a way to set future business goals. For example, Lacher explains, “Your utility bill can be three percent of revenue or it can be five percent, depending on how many horses you treat.”

Lacher prefers to look at modifying the top line rather than looking too closely at expenses, which you really can’t modify very effectively. In other words, look at growing your business’ overall revenue rather than focusing on cost cutting. “Many small businesses budget for projected expenses but don’t tie that expense budget into their revenue projections,” says Ken Gaebler, a business consultant and CEO of Gaebler.com. “If you only focus on expenses and ignore revenues, you can’t project future cash flows. That’s a disaster waiting to happen. You can be following your budget to a T and suddenly find you’ve got no money in the bank to pay your bills.”

That’s particularly true for equine practitioners, says Lacher, who might have seasonal spikes and dips in both revenue and expenses. “The reason why practitioners working off of budgets makes sense,” she says, is that “practitioners tend to forget that their insurance comes due in the month of May in the tail end of breeding season, and they’ll need to pay $12,000 of insurance that’s going to be due.” That’s just one example. Inventory bills, such as those received for a delayed billing order (see “Taking Stock,” page 17), can surprise practitioners. If you haven’t managed your cost-of-goods-sold line item correctly, inventory’s total percent of revenue can skyrocket.

Another important technique for business budgeting is making sure you’re putting the right items in the right budget buckets, and that those buckets aren’t too small. For example, you can budget for “pens” or you can budget for “office supplies.” As long as you include the bill from Office Depot in that category, you should be fine. You will get in trouble with your budget, however, if you end up lumping your entire pharmacy inventory in with “office supplies.” Inventory should have its own category, because it is an important financial benchmark.

Gaebler notes that involving the right members of your staff is important to the budgeting process. If you don’t know the details of your expenses, you can’t possibly develop a strong budget. Additionally, you actually have to assemble that budget team monthly to discuss what was in the budget and the actual expenses and revenue that the practice booked in comparison. From this information, you can revise your budget or make changes to your business to maximize your margins.

Getting Started

If you’re using Quickbooks to manage your financial data, your first step is very easy, although time consuming. Once you set up your budget, though, it’s just a matter of keeping it up to date.

1) View “Company Menu” and select budgets.

2) Input your expenses and income line by line to initiate your budget. You might consult a CPA who is familiar with veterinary businesses to determine the categories in the most efficient and important ways.

3) Review and adjust numbers to accurately project your business expenses, sales and end-of-the-month totals.

4) To build a future budget, multiply current revenue by the percent increase you’d like to see the following year. By looking at your historical invoices and revenue total you can estimate your annual percentage increase in revenue.

5) At the same time, remember that it takes money to make money, so consider that as you see more patients, your costs will increase as well.

6) Pay particular attention to cost of goods sold, cash required for necessary business expenses, day-to-day maintenance and operating costs, and revenues needed to support business operations and expected profit.

7) Now comes the analysis. Look at your percent of revenue for each expense category. By consulting a professional who understands your industry, you can determine if expenses are in line with other equine practitioners. Industry benchmarks, such as those developed by the National Commission on Veterinary Economic Issues, can be helpful, but remember these are highly generalized numbers. Working with consultants familiar with equine practices, and particularly those with an understanding of your practice, is another great way to go.

These individuals have a strong understanding of the differences between sectors within the equine veterinary field, such as breeding, racetrack or general-wellness mobile practitioner.

8) Once you understand your budget, you can set your goals. This upcoming year, resolve to build a better roadmap for your business by making a budget, a business plan and a path to future growth.

SIDEBAR

Top Budgeting Mistakes

* No budgeting. It’s like driving a car when you can only see two feet ahead of your front bumper.
* No business plan. Tie your budget to a three-year business plan.
* Failure to question every expense.
* Ignoring cash-flow considerations. If you only focus on expenses and ignore revenues, you can’t project future cash flows.
* Making spreadsheet errors.
* Starting too late.
* Failure to systematize budgeting.
* Not monitoring the budget.
* Failure to test assumptions. The budgeting process needs a devil’s advocate who questions every major assumption. Will gas cost $2.50 a gallon or will it cost $3.50 a gallon in 2010?—Ken Gaebler

Ken Gaebler is president of Gaebler Ventures, a business consulting firm based in Chicago; www.Gaebler.com.